Can China investors reap rich rewards as the Year of the Snake arrives?

Investors are hoping Chinese New Year celebrations this weekend will be the start of a successful and solid 12 months for their money thanks to an improved situation in the economic powerhouse.

Those pushing the case for China argue that stocks are cheap, growth has slowed to a more sustainable level and political uncertainty has been put aside for now, following last year’s election of Xi Jinping.

We take a look the case two fund managers put forward for investing and some experts' fund ideas to look at if you agree.

'The
hard landing so many economists had predicted did not come to pass,' he says. 'China’s economy grew a respectable 7.8 per cent in 2012,
ahead of Chinese government forecasts, with the rate of growth in the
last three months of the year showing clear signs of acceleration.

'While
this level of expansion does not match the growth of 9.5 per cent
recorded in 20112, it is strong enough, in my view, to dispel any unease
about the health of the economy.'

'The
International Monetary Fund has also forecast Chinese GDP growth of 8.2
per cent for 2013 and 8.5 per cent for the following year – a strong
indication it too believes the Chinese economy is back on track.

'For much of last year it seemed fashionable among economists, political commentators and analysts to talk about China as an accident waiting to happen.

'A sharp slowdown in economic growth, worries about inflation, the threat of a housing bubble and a tricky change of leadership for the Communist Party were all cited as reasons for investor caution. Fast forward to 2013 and these fears, in my view, now appear overblown. Against this backdrop, Chinese stocks remain very attractively priced.

'Industries we particularly like are new energy, environmental protection and information technology and China’s government has set itself an ambitious target to make sure these industries account for 15 per cent of the country’s GDP by 2020, up from just under 4 per cent now.

'Given the Chinese economy is likely to have doubled in size by then, the potential returns, in our view, are significant.'

Jeff Chowdhry, head of emerging equities at F&C Investments, is also keen on China.

He says: ‘We are seeing definite evidence of a stabilisation of the Chinese economy. Looking at key factors, such as the Purchasing Managers Index (PMI), infrastructure spending and residential property sales, there are signs that all of these areas are picking up.

‘Although we don’t expect double digit growth in 2013, all these areas indicate that the Chinese economy is likely to grow faster this year. This outlook is reinforced by the fact that we are in the first year of new leadership for the country. Historically, new leaders in China have tended to introduce structural measures, which lend credibility to the market.’

Enter the dragon: China is still a risk market to play for investors, argue experts

China shows encouraging signs but problems loom

Investing platform Fund Expert says China investors should tread warily and do their research carefully.

It says 'Back in August we highlighted encouraging signs of stability within the Chinese economy, as well as the cheap valuation of the Chinese equity market. Since then the best funds are up in excess of 20 per cent.

'China undoubtedly faces a formidable transition from a heavy reliance on exports and infrastructure spending towards consumption and services, high value manufacturing and technology.

'Serious doubts have also been raised over debt, with a recent report from GMO about the vulnerability of the Chinese economy due to very high levels of debt.

'So we believe the key to investing successfully in China during the next five years is to focus on the beneficiaries of change. There are problems, but in a market of this size the story isn’t all good or all bad.

'In addition, the Chinese market can turn on a sixpence. Retail investors account for 80 per cent of the local Chinese stock market activity (A shares), and they are heavily influenced by government policy announcements. So announcements of major, positive, reform programmes can rapidly galvanise investors and push markets higher. Look out for this over the next year.

'If A-share investors show confidence in their own stock market, it should also be a catalyst for renewed interest from overseas investors.'

Just because valuations are cheap doesn't mean they can't get cheaper

Darius McDermott, managing director of broker Chelsea Financial Services, says that investors should always remember China is high risk but for the brave it could be an opportunity to buy.

He says: 'The leadership handover went very
smoothly at the end of last year and there has been an increased amount
of positive newsflow regarding the economy, with slowing GDP growth
seeming to have bottomed.

'And,
while we have seen proof in the UK in recent weeks that economies are
not correlated to stock markets, better, more sustainable, growth rates
in China certainly won't hurt.

'Any
improvements in Chinese growth will also have a positive effect
elsewhere in the world as it should result in a pick-up of global
activity. In particular, commodities, mining and industrial sectors
should benefit, as well as countries like Brazil and Australia.

'Remember
- just because valuations are cheap, it doesn't mean they can't get
cheaper. But I'm a firm believer that if you buy at a low price, you
have a decent chance of making better returns than if you buy when
stocks are more expensive.

'However,
China is one of the highest risk markets and there is lots of
corruption, so investors should be fully aware of the risks before they
commit money to the asset class. For people willing to take the risk, I
think now may be a decent time to buy.'

China fund investing ideas

Fund Expertrecommends: For
those looking to invest in China we would favour dripping money in over
time, rather than invest a lump sum, as a lot could still go wrong.

Looking more widely at Asia, I was very impressed at a recent meeting with the manager of the Liontrust Asian Income fund, who is very bullish on the Chinese market with almost 30 per cent of the fund invested in the region.

For a more diversified investment into the market, I like the M&G Global Emerging Markets fund. The manager is more positive on the Chinese market than he has been for some time and, although he is still underweight the asset class, sees a lot of positives emerging.